WASHINGTON Aug 6 The U.S. Court of Appeals for
the Fourth Circuit upheld a major reform made to Baltimore's
police and firefighter pension plan on Wednesday, shedding light
on how judges may view the recent raft of changes in public
retirement funds around the country.
The court vacated a previous decision that the reform had
violated the U.S. Constitution's contract clause, and also
decided the change was permissible under Maryland's state
In 2010 Baltimore adopted a tiered system of annually
increasing pension benefits for retired public safety workers -
with retirees over the age of 65 receiving the largest cost of
living adjustment of 2 percent - and ended a system of giving
retirees bonuses when pension investments had good years.
When the pension funds' investments had earned more than 7.5
percent in a year, benefits increased, and the increases
compounded in the future. That led to an average annual increase
of 3 percent, according to court documents.
The tiered system "would not require the city both to bear
the burden of poor investment performance and to forego some of
the investment gains in years of strong performance," wrote
Judge Barbara Milano Keenan in Wednesday's decision.
Facing huge budget deficits from the 2007-09 recession and
financial crisis, Baltimore moved in step with other
municipalities and states to change its pensions in the hopes of
driving down costs. From 2009 to 2011, 43 states reformed their
retirement systems after the financial crisis ravaged the funds'
largest revenue source, earnings on investments.
Baltimore's firefighter and police unions sued, saying the
city was illegally violating a contract with the tiered system,
also following a national trend.
Most states treat public pensions as contracts. The first
wave of nationwide pension reforms sidestepped the possibility
of violating federal or state laws by only applying to new
hires. When modifications did not save enough money, some
governments then changed benefits for current retirees and
employees, prompting public workers to sue.
Divergences in how retirement systems operate and in state
laws mean there is no clear legal path to how the disputes will
resolve. Court battles have recently put Illinois pension
changes in limbo, for example.
The U.S. District Court for Maryland concluded that
Baltimore's "elimination of the variable benefit constituted a
substantial impairment of certain members' contract rights, and
that the impairment was not reasonable and necessary to serve an
important public purpose."
But the appeals court said the reform was a "mere breach of
contract, not rising to the level of a constitutional impairment
It also dismissed the notion that allowing the reform to go
through would give a city "unfettered discretion to breach its
contracts with public employees," because of protections in
"This contention lacks merit because, under Maryland law,
the city is only permitted to make reasonable modifications to
its pension plans," wrote Keenan. "Any reduction in benefits
'must be balanced by other benefits or justified by
countervailing equities for the public's welfare.'"
(Reporting by Lisa Lambert; editing by Andrew Hay)